Amazon Under Fire: What Happens When Sales Growth Isn't Enough?

Steve Schaefer
,
Forbes Staff
If you can put the word markets after it, I cover it.

The headline figure in
Amazon.com's second-quarter earnings report looked great -- a 23% jump in sales from the prior year, to $19.3 billion -- but the underlying figures for the unprofitable online retailer brought out the boo birds on Wall Street.

Amazon shares plummeted almost 11%, knocking $3.5 billion off the fortune of founder and CEO Jeff Bezos (now at $29.3 billion), after it lost 27 cents per share, much worse than the consensus estimate of 15 cents. The company's perpetual lack of interest in turning a consistent profit and declining gross margins -- which could fall further given the company's ambitious investing in new areas -- sparked concern among the analysts that watch the company.

"[I]nvestors are less patient than before regarding ongoing margin pressure," wrote Canaccord's Michael Graham, who rates the stock a hold and dropped his price target to $340 after Thursday's results.

UBS analyst Eric Sheridan argues that Amazon can keep growing revenue at a 20% annual clip, but that it might not be enough for the market. He thinks investors "will struggle to buy the stock until more gross profit drops to operating income." That leads to his neutral rating while the "tug of war" between profits and investments plays out.

Raymond James' Aaron Kessler dropped his rating to market perform despite remaining bullish on Amazon's long-term prospects, mostly because he expects shares to be stuck in a trading range "given continued high levels of investment combined with slowing unit growth (especially international growth)."

More of the same came from Barclays Capital analyst Paul Vogel. "Amazon has always operated at razor thin margins," he wrote, "but rapid revenue growth and optimism on long-term margin upside has been able to sustain the stock." That's certainly true, as shares have returned almost 700% over the last decade. But Vogel worries that "[w]ith revenue growth decelerating and margins moving in the wrong direction, the stock could be in for a bumpy ride."

Jefferies' Brian Pitz still has a bullish buy rating on the stock, but cut his target price to $435 from $450 and took the sunny view of Amazon's tug of war. "Guidance came in below Street expectations on ramp in investments but these are still driven largely by strong growth rather than competitive pressures," Pitz wrote.

Goldman Sachs' Heath Terry offered a similar sentiment. Terry noted that the pressure on Amazon margins are "clearly testing investor patience," but argued that Bezos' focus on constant investments in areas like grocery deliveries will have a productive endpoint. "We believe, as they have historically, these investments will generate incrementally higher levels of revenue and operating cash flow growth, ultimately driving share price outperformance."

At the moment though, confidence that Bezos knows best isn't running at an all-time high. With Friday morning's 10.7% loss to $320.42, shares of Amazon are down nearly 20% for the year.